German Finance Minister Hans Eichel has admitted for the first time that Germany's budget is likely to fall short of EU standards this year.

EU member states are obliged to keep their budget deficit to below 3% of economic output.

Only a few weeks ago, Germany said its deficit would meet the desired target.

But the cost of clearing up after the floods, and the weakening German economy have taken their toll on public finances.

The European Commission said that if Germany did overshoot the limits it would have to start disciplinary action.

Red faces

The news is a further blow for the EU stability pact, whose rules were already relaxed a few weeks back.

Germany was instrumental is setting up the stability pact, designed to keep the economies of member states in step.

It is also an embarrassment to Germany, since Berlin has previously stressed the need to abide by the strict public deficit rules.

But earlier this week, Chancellor Gerhard Schroeder suggested the pact should be interpreted "flexibly".

Warning

Following Mr Eichel's statement, European Commission's Monetary Affairs Commissioner Pedro Solbes warned that action may have to taken against Germany.

"In case German government data or the Commission forecasts confirm that the 3% of GDP limit is breached in 2002, the Commission has to trigger the excessive deficit procedure of the Stability and Growth Pact," Mr Solbes said in a statement.

"This is also in line with the Eurogroup conclusions of last week in which ministers underlined that the procedures for
preventing and correcting excessive deficits must be implemented in a strict and timely manner."

But Mr Solbes added that Germany's budget plans seemed to show that "decisive steps for budgetary consolidation are planned for 2003 and 2004".

Promising to do better

Mr Eichel's confession came just hours after Mr Solbes said that EU budgetary policy was facing a critical test in the coming months.

Although Portugal has already breached its 3% limit, Germany is the first major European economy to do so.

But France and Italy are also struggling to toe the line.

Mr Eichel insisted that Germany's deficit would shrink in 2003.

But economists have questioned whether this will be possible if the economy continues to deteriorate.